Why Microsoft Is a Smarter Investment Than Apple These Days

Apple is just not cheap enough for us to take the risk that its long string of successes will remain unbroken.

Editor's note: Kiplinger.com readers are getting a sneak peek at this column, scheduled to appear in the April 2011 issue of Kiplinger's Personal Finance.

One of the toughest calls we have to make as value investors is how much weight to assign a stock’s price relative to the underlying company’s growth potential. Pay too much, and even stocks of the best companies can turn out to be clunkers. If, say, you had paid $70 for a share of Cisco Systems (symbol CSCO) in mid 2000, you would have lost 70% of your money to date, even though the company’s earnings per share have quadrupled. How is that possible? Simple: In 2000, the stock traded at 194 times the previous 12 months’ earnings. Today, it sells for 16 times trailing earnings. On the other hand, an inferior business selling at a cheap price can be a value trap -- a stock that appears inexpensive year after year but goes nowhere or declines as the business fades (think newspaper publishers and check printers).

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

To continue reading this article
please register for free

This is different from signing in to your print subscription

Why am I seeing this? Find out more here

John Heins
Contributing Editor, Kiplinger's Personal Finance